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Infrastructure debt: a global perspective

Darryl Murphy casts an eye across the global market to see where investors are likely to find opportunities in infrastructure debt.

4 minute read

Infrastructure debt, like many other asset classes in recent years, has not been immune to investors’ relentless search for yield. As such, when scouring the market for value, it helps to have access to international as well as domestic opportunities.

Fortunately for investors, deal activity has remained robust, with the global infrastructure debt market totalling around $282 billion1 last year – a slight increase on 2016. While the promised Trump infrastructure boom has been more illusory than reality so far – more of which later - the US still delivered $52 billion of deals in 2017; significantly above any other market and not far short of the total for continental Europe.

Belying Brexit uncertainty, the UK was the second biggest source of activity with $34 billion of deals; just ahead of Australia, which continued to demonstrate its ability to deliver a $30 billion market year after year.

Globally, volumes were driven primarily by continued M&A activity, refinancings and the continued rise of renewable energy. One noteworthy disappointment was the continued reduction in greenfield activity.

So what can we expect in 2018? Following his recent outlook for UK infrastructure debt, Darryl Murphy, head of infrastructure debt at Aviva Investors, picks out some of the key themes that could characterise the global market this year.

North West Europe: steady as she goes

Activity is likely to remain consistent across Europe. While conditions remain attractive for borrowers, a particular focus will be refinancings of transactions completed around the global financial and European sovereign debt crises, when credit spreads were much wider.

Greenfield activity has been sluggish, with few countries having a deep pipeline of public-private partnership (PPP) transactions. PPP activity has been driven by the Netherlands, where there remain a few transactions to close in 2018. While transaction volumes are likely to be modest in 2018, there are at least signs that a decent PPP pipeline is building: the French and Irish Governments have made strong signals about new projects; there are German roads in the pipeline and an ambitious road programme in Norway.

M&A activity remains strong in Europe, although the extent of privately-owned infrastructure is not as great as the UK. Renewables will likely be the main growth engine; in particular offshore wind, with opportunities for construction in France and Holland along with refinancings in Northern Europe and Germany.

Perhaps the biggest unknown is what happens to borrowing conditions as the European Central Bank (ECB) begins to wind down its quantitative easing programme. It is surely no coincidence that commercial banks have continued to lend aggressively during the period of bountiful ECB liquidity: this could quickly change when the ECB applies the brakes.

The return of Southern Europe?

Southern Europe, a market that was effectively closed for a number of years, is being watched closely by investors looking for value. Spain, Italy and Portugal are the three most likely sources of activity.

The announcement of a new €5 billion roads programme in Spain is a noteworthy development; an echo of the halcyon days of the mid 2000s when PPP was used extensively across Europe. While pricing in Southern Europe reflects a degree of investor caution, programmes such as this - along with the leverage large contractors have on local banks - may lead to a convergence of value towards NW Europe.

Canada and Australia: tried and tested

Outside Europe, Canada and Australia continue to lead the way; with transactions totalling $11billion and $30 billion respectively in 2017. Both offer a range of opportunities across the transport and energy sectors with renewables again playing a prominent role.

The PPP model is active in both countries, along with a wider privatisation agenda in most Australian states that provides a diverse mix of opportunities. While natural resource prices remain depressed and the previous investment in mining has receded, large financings continue in the oil and gas and LNG sectors in Australia.

So much for the Trump effect

While investors may look longingly at the US as a source of untapped potential, many overlook the fact it remains the largest market globally with over $50 billion of infrastructure debt activity in 2017. An interesting characteristic is the absence of ‘mega deals’ evident elsewhere, but the volume of transactions is large with 149 deals.

Conventional power remains the largest sector with nearly $30 billion of deals executed in 2017, while renewables provided $14 billion. Despite the prominence of transport historically, it delivered only $6 billion of activity last year. This highlights that investors looking to develop in the US need to look across – and beyond - the transport and energy sectors .

Looking ahead, if President Donald Trump delivers a fraction of the infrastructure the US needs, it would be a game changer for investors. The US faces a huge challenge of upgrading and replacing ageing infrastructure, especially in the transportation sector, which has seen years of underinvestment.

The PPP model has been used in the road and rail sectors, but the increased growth into social infrastructure such as schools, hospitals and government buildings has not gained momentum compared to Canada, where the model is well established.

Despite strong interest from European investors, a sustainable pipeline in the US remains elusive. This is made more challenging by infrastructure being delivered at a state and municipality level, with little central support or control.

Latin America: the emerging focus

Investors in North America feeling frustrated with the relative lack of PPP and transport activity are increasingly looking south. Mexico was the sixth biggest infrastructure debt market globally in 2017 with $12.5billion of deals, while there is encouraging activity in Peru, Colombia and Chile; including transportation PPP and the presence of European contractors and equity investors.

There is evidence to suggest these markets should no longer be considered emerging, with a number of deals sold to international investors based on strong financial structures. Argentina continues to provide a mix of renewables and power project deals, while Brazil recovered from its investment doldrums with over $9 billion of transactions in 2017, mainly in the renewables sector.

The Middle East, Asia and Africa

Historically, the Middle East has been the driving force of project finance through a steady supply of large power projects. A general slowdown in investment has reduced deal volumes but the common theme of renewables has shaped the infrastructure market. Last year, we saw solar projects in Egypt, Jordan and the UAE, while there are ambitious plans for the sector in Saudi Arabia.

Activity in Asia is challenging for investors given strong fragmentation across the region. The real infrastructure investment engines remain China and India, although both only provided limited private finance activity in 2017 ($1 billion and $3 billion respectively). These markets remain out of scope for the vast majority of European investors, with a limited role for truly private capital.

Africa delivered nearly $10 billion of deals in 2017, including the $4.7 billion Coral South LNG deal in Mozambique. Historically, the market has been reliant on multilateral and development banks to provide financing; however, equity investors are starting to look across Sub-Saharan Africa. On that basis, the rise of Africa as a destination for European debt investors can only be a matter of time.

Infrastructure is not discretionary and the economic growth required in Africa, combined with continued population growth and urbanisation, will result in a high demand for infrastructure for decades. The challenge for European investors will be having confidence in local markets, which hinges on long-term political stability across the continent.

References

1 Infranews, as at 29 December 2017

Author

Important Information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (Aviva Investors) as at 6th February 2018. Unless stated otherwise any view sand opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this document, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This document is not a recommendation to sell or purchase any investment.

In the UK & Europe this document has been prepared and issued by Aviva Investors Global Services Limited, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes. In Singapore, this document is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited for distribution to institutional investors only. Please note that Aviva Investors Asia Pte. Limited does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia Pte. Limited in respect of any matters arising from, or in connection with, this document. Aviva Investors Asia Pte. Limited, a company incorporated under the laws of Singapore with registration number200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583.In Australia, this document is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd for distribution to wholesale investors only. Please note that Aviva Investors Pacific Pty Ltd does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Pacific Pty Ltd in respect of any matters arising from, or in connection with, this document. Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000

The name “Aviva Investors” as used in this presentation refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606

RA18/0165/31082018

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